“Would it not be easier…for the government to dissolve the people and elect another?” wrote Bertolt Brecht, the German playwright, in the 1950s. After last week, and despite surviving a no-confidence vote, Theresa May might also wish to dissolve parliament – and who can really be certain she won’t, thereby triggering an election, given the many imponderables now weighing on Brexit planning? As things stand, however, and following the biggest ever Commons defeat for a UK government, it appears that power is flowing inexorably from prime minister to parliament.
All the same, parliament remains as divided on Brexit as the nation it represents. Theresa May has held talks with MPs since the vote, but offered no meaningful concessions, while still hoping that Brussels might offer some kind of ‘Irish backstop’ get-out clause that will enable her to pass something that may otherwise look much like the previous deal. She has to propose her ‘new’ deal to the Commons today, and face yet another vote on 29 January.
The Labour leadership, now that the government’s plan has been rejected in the Commons, could yet play kingmaker to one of the various Brexit plans on offer. Instead, it has tied its colours firmly to the fence; in the end, there were only 71 Labour MPs willing, last week, to publicly back calls for a second referendum. Officials in Brussels, meanwhile, are reportedly unanimous in assuming that the UK will choose not to leave the EU on 29 March. Less than ten weeks before the UK is due to leave, confusion reigns.
Not that markets seem too troubled – or not yet. The FTSE 100 ended the week pretty much flat, perhaps helped by UK inflation falling to a two-year low in December, which lowers the chances of interest rate rises. Sterling, usually the punchbag for Brexit fears, is up some 2% against the dollar over the past month, possibly buoyed by retreating expectations of a hard Brexit.
“Sterling and UK equities, especially domestically-orientated shares, have been shunned by overseas investors, providing scope for some good returns if a sensible deal eventually emerges,” said George Luckraft of AXA Investment Managers.
If there is a major financial worry in the UK beyond the nature of Brexit, it should perhaps be debt. Since 2017, every part of the UK economy has spent more than it has earned – households, businesses and government alike. (Moreover, the latest outlook for the UK housing market is the most negative this century.) Investors can never afford to ignore the balance sheets of the companies they invest in – now, perhaps, even less so.
Last week, the Institute of International Finance published its quarterly Global Debt Monitor, which showed that global debt stands at 318% of GDP – a record $244 trillion. US government debt has become a live worry on markets, given how Donald Trump’s tax cuts have increased the need for Treasury issuance. Yet even as the government shutdown continued, the yield on US 10-year government debt remained comfortably below 3%.
Moreover, US stocks enjoyed a strong week, thanks in part to some good earnings announcements. Defence stocks were boosted by the government’s announcement of a new missile defence initiative, while bank stocks rose following earnings announcements by Goldman Sachs and Bank of America Merrill Lynch. Technology stocks also enjoyed some respite, after Netflix announced price rises. However, the most important tailwind came in the form of US–China trade talks; and stocks were especially buoyed by reports on Thursday that Steve Mnuchin, US Treasury Secretary, had proposed to lift tariffs on China. Despite senior Trump officials quickly denying the truth of the reports, the S&P 500 surged on Friday and ended the week up almost 3%.
“Recent comments continue to suggest that a US-China trade deal is on the cards in the weeks ahead, and this impression was affirmed in our meetings with policymakers in Washington during the course of the past week.,” said Mark Dowding of BlueBay Asset Management.
Conversely, Huawei, the Chinese tech major, now faces a US criminal probe for allegedly stealing trade secrets and Germany decided, following wider European pressure, to block Huawei from 5G contracts.
In China, market sentiment was also fired by The People’s Bank of China, which announced the injection of more than 500 billion renminbi ($75 billion) into China’s banking system. The move offered some relief to investors worried by news that car sales in China last year fell for the first time this century – down 4.8% on the previous year. Asian shares remain cheap relative to historical valuations and, already, there are signs this year of investors taking renewed interest in emerging markets. Another tailwind for emerging markets has been promises of fiscal reform by the new president of Brazil, which boasts the best-performing currency of 2019.
AXA Investment Managers and BlueBay are fund managers for St. James’s Place.
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